06 Cost Estimating

Training Services
Cost Estimating
2003 ENGINEERING DESIGN SEMINAR – LIMITED DISTRIBUTION: This material is UOP LLC technical information of a confidential
nature for use only by personnel within your organization requiring the information. The material shall not be reproduced in any manner or
EDS 2003/CE-1
distributed for any purpose whatsoever except by written permission of UOP LLC and except as authorized under agreements with UOP LLC.
Capital Cost Estimating
Seminar Outline
n Project Stages/Use of Cost Estimates

n Elements & Techniques of a Cost Estimate
n Cost Indexes/Escalation
n Contingency
n Cost Study Example Using Aspen Icarus
Process Evaluator
n Estimating Tools
EDS 2003/CE-2
Project Stages
Market Study
Feasibility Study
Engineering
Construction
Startup
CE-R00-01
EDS 2003/CE-3
Market Study
Abandon
Project
Supply and Demand

Proceed to
Price Forecasts Decision Next Step
Economic Indicators
Consider
Alternatives
CE-R00-02
EDS 2003/CE-4
Feasibility Study
Abandon
Project
Raw Materials
Processing
Operations Proceed to
Decision Next Step
Cost Estimates
- Fixed Capital
- Utilities, catalyst
Economic Analysis
Consider
Alternatives
CE-R00-03
EDS 2003/CE-5
Engineering Stage
Abandon
Equipment Specifications Project
Plant Layout
- Piping
- Foundations
- Structures Proceed to
Decision Next Step
Utility Specifications
Cost Estimates
- Fixed Capital
- Operating
Consider
Economic Analysis Alternatives
CE-R00-04
EDS 2003/CE-6
Project Stages and Cost Estimates
Scope Definition Estimate Accuracy
Order of Magnitude (+/- 50%)
Project Milestones
1. Planning and Analysis
2. Design Basis Selected
3. Process Design Complete
4. Detailed Design Complete
5. Mechanical Erection Complete
6. Startup
Uncertainty
Preliminary Budget (+/- 30%)

- Curve
- Factored
Detailed (+/- 10%)
Definitive (+/- 5%)
1 2 3 4 5 6
Project Milestones
CE-R00-05
EDS 2003/CE-7
Cost Estimate Types
n Order-of-Magnitude
n Preliminary Budget
n Detailed Cost Estimate
EDS 2003/CE-8
Order-of-Magnitude Cost Estimate
n Purpose
– Project Screening
– Preliminary Feasibility Studies
n Methods
– Periodicals/Trade Journals
– Capacity Ratio ($/bbl)
– Nelson Complexity
n Accuracy
– +/- 50% or Greater
n Minimum Engineering Required
– None
EDS 2003/CE-9
Preliminary Budget Cost Estimate
n Purpose
– Refined Feasibility Studies
– Preliminary and Refined Economic Studies
– Licensor Selection
– Preliminary Project Budget
n Methods
– Capacity Curve Type
– Factored Type
n Accuracy
– +/- 25-40%
– Yield Estimates
– Preliminary Equipment Sizing
EDS 2003/CE-10
Detailed Cost Estimate
n Purpose
– Refined Economic Study
– Establish Project Budget
– Contractor Selection
n Methods
– Detail
n Accuracy
– +/- 5-10%
– Schedule A
– Detailed Design
EDS 2003/CE-11
Elements & Techniques
of a Cost Estimate
n Basic Elements
n Detailed Elements
n Standard Basis
n Local Basis
EDS 2003/CE-12
Basic Elements
Capital Cost
Project Battery Limits
Special Requirements
Contingencies
EDS 2003/CE-13
n Direct Field Costs

– Major Equipment
– Bulk Materials
– Installation Labor
— Permanent Installation of Physical

Components
EDS 2003/CE-14
n Indirect Field Costs

– Construction Equipment
– Temporary Construction
– Field Expenses and Services
– Construction Insurance
– Labor Benefits and Burdens
— Nonpermanent Facilities and Services

Required to Execute the Project
EDS 2003/CE-15
n Home Office Expense

– Engineering
– Procurement
– Construction Services
– Construction Supervision
– Bonding
– Contractor’s Fee
— Services and Management for the Project
EDS 2003/CE-16
Special Requirements
n Property Costs
n Taxes and Duties
n Project Development Costs
n Royalties/Know-How Fees
n Catalyst and Chemicals
n Start-up Costs
n Operations and Maintenance
– Any Requirement Considered Part of Capital

Cost
EDS 2003/CE-17
Contingency
n Scope Definition
n Economic Changes
n Basis Definition
n Process Experience
n Estimating Methods
n Undefined Occurrences
– Anticipating and Preventing Losses
EDS 2003/CE-18
Basic Elements
n Project Battery Limits

n Special Requirements
n Contingencies
– All capital projects have these basic elements
– Cost estimates should be expressed in terms of
what is included and what is excluded
EDS 2003/CE-19
Detailed Elements
n Examples of the Next Level of Capital Cost

Estimating:
– Major Equipment
– Instrumentation
– Electrical
– Piping
– Bulks
EDS 2003/CE-20
Standard Basis
n What is a Standard Basis Cost Estimate?

n U.S.A. Gulf Coast?
n How is Standard Basis Used?
EDS 2003/CE-21
Standard Basis
n What is a Standard Basis Cost Estimate?

– Project Battery Limits
– Provides Essential Costs
– A Common Reference
EDS 2003/CE-22
Standard Basis
n U.S.A. Gulf Coast

– Two thirds of U. S. refining/petrochemical
industry located on Gulf Coast
– Very high construction experience
– A common reference basis for owners and
contractors
EDS 2003/CE-23
Standard Basis
n How is Standard Basis Used?

– A comparable reference point to past projects
– A consistent basis for data collection
– A common basis for conversion to other locations
– An accepted industry wide reference
EDS 2003/CE-24
Local Basis
n What is a Local Basis Cost Estimate?

– Levels of influence
– Comprehensiveness of a local basis cost estimate
EDS 2003/CE-25
Local Basis
n What is a Local Basis Cost Estimate?

– A comprehensive evaluation of specific
conditions and requirements for a project such
as local labor, imported equipment, taxes and
duties, contract type
– A total installed (budget) cost for a specific scope
EDS 2003/CE-26
Local Basis
Levels of Influence
International National Local Project Contractor
Political X X X X X
Financial X X X X X
Legal X X X X X
Social X X X X X
Geographical X X X X
Industrial X X X
EDS 2003/CE-27
Local Basis
Comprehensiveness
n Procurement Plan for Equipment and Materials

n Field Labor Plan
n Field Labor Cost Basis
n Subcontracting Plan
n Site Sub-Soil Conditions
n Plot Plan for New and Existing Facilities
EDS 2003/CE-28
Local Basis
Comprehensiveness
n Equipment and Material Transportation Plan

n Field Supervision Plan
n Philosophy of Detailed Design
n Contractor’s Work Methods
n Type of Project Contract
n Project Schedule
EDS 2003/CE-29
Local Basis
Comprehensiveness
n Construction Equipment Plan

n Temporary Construction Facilities Plan
n Construction Services Including Utilities Supply
n Bonding and Insurance
n Construction Safety
EDS 2003/CE-30
Local Basis
Comprehensiveness
n Labor Mobilization/Demobilization
n Labor Camp and Catering Requirements
n Spare Parts
n Escalation
EDS 2003/CE-31
Cost Indexes/Escalation
n Use of Cost Indexes

n Escalation
EDS 2003/CE-32
Use of Cost Indexes
n Update Past Cost Estimates
Example:
Year Index
1991 361
2001 395
Escalation Factor from 1991 to 2001 is:

395/361 = 1.09
Applying Factor to 1991 Cost Estimate gives:

$1,000,000 (1991) x 1.09 = $1,090,000 (2001)
EDS 2003/CE-33
Source of Cost Indexes
n Major U.S. Cost Indexes

– Nelson (Oil and Gas Journal)
– ENR (Engineering News Record)
– Chemical Engineering (McGraw-Hill)
– Marshall and Swift
– BLS (U.S. Bureau of Labor Statistics)
EDS 2003/CE-34
Major Index Comparison
ENR NELSON CHEMICAL MARSHALL &

Construction R e finery Index ENGINEERING SWIFT Index
Index Index
Index for Complete NO YES YES YES
Chemical Plants (Excluding
Buildings)
Index for General NO YES YES NO
Process Equipment
Specific Classes of NO YES YES NO
Equipment
Separate Index for YES NO YES YES
Buildings
Index for Large Civil YES NO NO NO
Projects
Correction for Labor NO NO YES YES
Productivity
Correction for Technical NO NO NO NO
Improvement
EDS 2003/CE-35
Cost Index Comparison
ENR Nelson CE M&S UOP
140
130
120
Index
110
100
90
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Year
EDS 2003/CE-36
Escalation
n Adjust Cost Estimate for Increasing Costs Over

Time
Example:
Inflation Rate from 1997 to 2001:
5%/Year
Right Way:
$1,000,000 x (1.05)4 = $1,215,500
Wrong Way:
$1,000,000 x (1 + (0.05 x 4)) = $1,200,000
EDS 2003/CE-37
Contingency
n Contingency Definition
n How Is It Used
n Project Definition
n Project Evaluation
EDS 2003/CE-38
Contingency Definition
n An amount added to an estimate to allow for

changes that experience shows will likely be
required. AACE
n An amount added to an estimate to allow for

probable, undefined occurrence and for
unforeseen occurrence.
EDS 2003/CE-39
Contingency
How Is It Used?
n Cover Inadequacies in Scope Definition
n Anticipate Escalation and Currency Changes
n Improve Confidence in Estimate Basis Such as

Labor Productivity, or Sub-Soil Information
EDS 2003/CE-40
Contingency
How Is It Used?
n Improve Confidence in (New) Process Experience
n Cover Unforeseen Occurrences Such as Labor

Disruptions or Epidemic Illness
n (Political) Decrease Chances Project Budget Will

Be Over Run
EDS 2003/CE-41
Contingency
Project Definition
n General Project Basis (1 to 5 Factor)

n Process Design Basis
n Site Information
n Engineering Design Basis
n Detailed Design
n Field Performance
EDS 2003/CE-42
Contingency
Project Evaluation
n Effectiveness of Management
n Effectiveness of Control Systems
n Allowance for Additional Escalation
n Addition Work/Rework
n Extended Project Schedule
n Engineering Status at Time of Estimate
n Variations in Estimating Methods
EDS 2003/CE-43
Contingency
Project Evaluation
n Premiums for Availability and/or Delivery

n Fluctuation in Currency Exchange Rate
n Outbreak of Epidemic Illness
n Unforeseen Subsurface Conditions
n Changes in Taxes and/or Duties
n Repeat Takeover and Performance Tests
n Default by Contractor
n Variations in Labor Productivity
EDS 2003/CE-44
Cost Study Example
n Design Influence and Timing

n Costing Method Used By UOP
EDS 2003/CE-45
Design Influence on Project
versus Time
Project
100 Expenditures
High
90
80 Design
70 Influence
on Cost
60
50
40
30
20
Low10
0
Conceptual Detailed Engineering Start Up Operations
Definition & Procurement
Basic Design and Construction
EDS 2003/CE-46
Estimating Resources and Tools
n Professional Organizations
n Published Materials
n Tools
EDS 2003/CE-47
Professional Organizations
n AACE International
209 Prairie Ave., Suite 100
Morgantown, WV 26501 USA
800-858-COST or 304-296-8444
www.aacei.org
n Project Management Institute

Four Campus Boulevard
Newton Square, PA 19073-3299 USA
610-356-4600
e-mail: pmihq@pmi.org
EDS 2003/CE-48
Published Materials
n Richardson Engineering Services

P.O. Box 9103
Mesa, AZ 85214-9103
480-497-2062
n Thomas Register of American Manufacturers

Five Penn Plaza
New York, NY 10001
212-695-0500
EDS 2003/CE-49
Tools
n Aspen Technology, Inc.

Icarus Office
600 Jefferson Plaza
Rockville, MD 20852-1150
301-795-6800
– Aspen Icarus Decision Analyzer

– Aspen Icarus Process Evaluator (IPE)
– Aspen Icarus 2000
– Aspen Icarus Project Manager
EDS 2003/CE-50

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Training Services

n Project Stages/Use of Cost Estimates

Supply and Demand

Order of Magnitude (+/- 50%)

Preliminary Budget (+/- 30%)

Detailed (+/- 10%)

Definitive (+/- 5%)

Project Battery Limits

n Direct Field Costs

— Permanent Installation of Physical

n Indirect Field Costs

— Nonpermanent Facilities and Services

n Home Office Expense

— Services and Management for the Project

– Any Requirement Considered Part of Capital

– Anticipating and Preventing Losses

n Project Battery Limits

n Examples of the Next Level of Capital Cost

n What is a Standard Basis Cost Estimate?

n What is a Standard Basis Cost Estimate?

n U.S.A. Gulf Coast

n How is Standard Basis Used?

n What is a Local Basis Cost Estimate?

n What is a Local Basis Cost Estimate?

International National Local Project Contractor

n Procurement Plan for Equipment and Materials

n Equipment and Material Transportation Plan

n Construction Equipment Plan

n Use of Cost Indexes

n Update Past Cost Estimates

Escalation Factor from 1991 to 2001 is:

Applying Factor to 1991 Cost Estimate gives:

n Major U.S. Cost Indexes

ENR NELSON CHEMICAL MARSHALL &

n Adjust Cost Estimate for Increasing Costs Over

n An amount added to an estimate to allow for

n An amount added to an estimate to allow for

n Cover Inadequacies in Scope Definition

n Anticipate Escalation and Currency Changes

n Improve Confidence in Estimate Basis Such as

n Improve Confidence in (New) Process Experience

n Cover Unforeseen Occurrences Such as Labor

n (Political) Decrease Chances Project Budget Will

n General Project Basis (1 to 5 Factor)

n Premiums for Availability and/or Delivery

n Design Influence and Timing

n Project Management Institute

n Richardson Engineering Services

n Thomas Register of American Manufacturers

n Aspen Technology, Inc.

– Aspen Icarus Decision Analyzer

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